How a New Law Firm Partner can Best Prepare for Tax Season

Making partner at a law firm is an exciting milestone, but it comes with a set of financial complexities that many new partners aren’t prepared for—taxes chief among them. Transitioning from an associate to a partner fundamentally changes how you’re taxed, shifting you from a traditional employee to a business owner. This change brings opportunities for wealth building but also significant responsibilities. Preparing for this transition can save you money, reduce stress, and help you start your partnership on the right financial footing.

If you’ve recently made partner or are on track to do so, here’s what you need to know to prepare for your taxes effectively.

One of the biggest changes when you become a partner is the switch from receiving a W-2 to a K-1 form. Unlike a W-2, which reports wages and has taxes withheld, a K-1 reports your share of the partnership’s income, deductions, and credits. The critical difference? You are now responsible for estimating and paying your taxes quarterly, instead of having them automatically withheld from your paycheck.

The IRS expects quarterly payments on your income, and failure to pay on time or in sufficient amounts can result in penalties. To avoid this, work with a tax professional to calculate your quarterly payments accurately. Your estimated payments should cover not only your federal income tax but also state taxes and self-employment taxes.

As a partner, you are now considered self-employed for tax purposes, which means you’re responsible for both the employer and employee portions of Social Security and Medicare taxes, totaling 15.3% of your income up to the Social Security wage base. Beyond that limit, you’ll still owe the Medicare portion on additional earnings. This self-employment tax can come as a shock to new partners, especially when combined with higher income levels.

The best way to manage this tax burden is to account for it in your estimated quarterly payments. A tax advisor can help you estimate these amounts based on your firm’s projected earnings and your share of the partnership’s profits.

Becoming a partner often requires a significant capital contribution to the firm. This buy-in represents your share of ownership and is typically funded through personal savings or financing. While the capital contribution itself is not tax-deductible, understanding its implications is key to managing your taxes effectively.

If you finance your buy-in with a loan, the interest on that loan may be deductible under certain circumstances. Additionally, some firms structure buy-ins in ways that allow for tax benefits, so it’s crucial to clarify these details with your firm’s finance team and your CPA.

Partnership income often fluctuates more than a steady associate salary, which can make budgeting and tax planning a challenge. As a partner, you’ll receive distributions based on the firm’s profits, and these can vary from year to year. To prepare for this variability, it’s wise to set aside a portion of each distribution in a high-yield savings account specifically for taxes.

Creating a cash reserve for taxes will help you avoid scrambling to make quarterly payments during leaner months. Financial planners often recommend keeping at least 25-30% of each distribution in a separate account earmarked for taxes.

While becoming a partner comes with increased tax responsibilities, it also opens the door to new deductions. Partners can often deduct a range of business-related expenses that were not available as an associate, such as travel costs, client entertainment, continuing education, and even home office expenses if you work remotely.

It’s important to track these expenses meticulously throughout the year. Use a dedicated credit card for business expenses and maintain detailed records. Many partners find it helpful to work with a CPA who specializes in law firm taxation to ensure they’re maximizing their deductions without crossing into questionable territory.

Making partner also means you may be contributing to the firm’s retirement plan as an owner, rather than as an employee. Law firms often offer defined contribution plans like 401(k)s or cash balance plans specifically for partners. Contributing the maximum allowable amount to these plans not only helps you build long-term wealth but also reduces your taxable income for the year.

If you’re nearing or over the income threshold for certain deductions, retirement contributions can help keep your taxable income below key limits, allowing you to take advantage of additional tax breaks. Discuss with your financial advisor how to optimize these contributions based on your overall financial plan.

The increased income and complex tax structure of partnership may push you into a higher tax bracket, and that could make you subject to the Alternative Minimum Tax (AMT). AMT is a parallel tax system designed to ensure that high earners pay at least a minimum level of tax, even if they use deductions to lower their regular tax liability.

Understanding whether you are subject to AMT and how to minimize its impact is crucial. A tax professional can help you identify deductions and credits that won’t trigger AMT, such as retirement contributions or donations made through a donor-advised fund.

Many law firms distribute income on a deferred basis, meaning you may not receive all of your earnings in the same calendar year. While this can create a tax advantage by spreading income across multiple years, it also requires careful planning. Deferred compensation may affect your cash flow for estimated taxes, so it’s important to work closely with your firm’s finance department and your tax advisor to understand how these distributions will impact your overall tax picture.

Finally, the best preparation for your taxes as a new partner is assembling a strong team of advisors. A CPA who specializes in partnership taxation, a financial planner with expertise in working with attorneys, and even a bookkeeper can be invaluable in navigating your new financial responsibilities.

Making partner is a tremendous accomplishment, and while it brings added financial complexities, it also offers significant opportunities for wealth building. By understanding your new tax obligations and planning proactively, you can make the most of your partnership income while avoiding costly mistakes. With the right strategies and a solid team of advisors, you’ll be well-equipped to thrive in your new role.